The results of the EFB-KPMG Tax Monitor (PDF 3MB) show that, in many European countries, governments still impose a tax on intergenerational family business transfers. Many European countries apply reliefs; however, if one is not prepared, the tax obligations can be severe. The Tax Monitor studies an example of a small family business valued at €10 million with a potential tax burden on succession through inheritance or succession on retirement.
Tax due on succession through inheritance:
Out of the 23 surveyed countries, 7 impose no taxes whatsoever. Assuming that no reliefs are applied, the potential tax burden varies from €0 to €4m. The figures highlight the importance of early preparation because the tax landscape changes dramatically when tax exemptions are taken into account. Now the number of countries which impose no tax goes from 7 to 13. But even with exemptions certain countries impose comparatively high levels of tax, with the maximum being €1.5m.
In the UK the tax due on succession through inheritance in the scenario studied was €3,884,581 with no exemptions – the second highest of the countries analysed. But this reduced to zero if available exemptions and reliefs were applied.
Tax due on succession on retirement:
Out of the 23 surveyed countries, 6 impose no taxes whatsoever. Once again assuming no reliefs, the potential tax burden can be significant, with the top 4 countries levying between €2.8m and €4.2m upon a transfer of the business. When we look at the tax landscape with reliefs major changes occur. Now 13 countries apply no tax, but the top 6 still levy a comparatively high amount of between €0.3m and €1.5m.
In the UK the tax due on succession through retirement in the scenario studied was €2,520,000 with no exemptions – the fifth highest of the countries analysed. Again this reduced to zero if available exemptions and reliefs were applied.
Exemptions available in the UK
The exemptions available in the UK are laid out below and they all apply to the case study analysed for this research.
- Inheritance Tax – 100% or 50% Business Property Relief available if it is a qualifying business.
- Transfer of relevant business property – Business assets have been held for at least 2 years prior to transfer.
- Capital Gains Tax – Gift Hold Over Relief:
- No capital gains tax will be paid by the donor instead the gain is rolled-over reducing the recipient’s base cost.
- Entrepreneurs’ Relief – 10% tax rate on first £10 million gain on disposal of business.
Transfer of family business in Europe still a major challenge:
What is clear from the study is that family businesses can face an uphill struggle if they want to keep running the business within the family. Taxes are charged in many countries, but no cash has been generated by the individuals or the business as a result of the business transfer. The funds to meet the tax levy must be found from other sources. This reality can severely hinder the future growth and investment capacity of a business. Finally, the differing tax treatment of inheritance and retirement is interesting, and such policy differences can often result in changes to the families’ behaviours. For example, the leaders of family businesses may hold on to control of the business for tax reasons, which can be frustrating for the next generation and act as a constraint on business growth.
Roger Pedder, EFB President commented:
“This study is important and revealing. We see that the potential tax burden of family businesses who want to transfer the ownership to the next generation can be significant. It is encouraging that many of the surveyed countries have reliefs for family business, which implies that there is a recognition of the importance of the sector. Exercises like this one highlight best practices across Europe which we hope others will follow”.
Gary Deans, Tax Leader for Family Business at KPMG in the UK and Europe, said:
“The impact of tax on a family business can vary dramatically from country to country . This is no surprise as the lack of clarity around reliefs, exemptions and how to qualify for them can be challenging. Not everyone’s situation will qualify for the various reliefs of course but our study shows that they can make a dramatic difference to the amount of tax payable when they do apply.
“The issue of taxation is likely to remain high on the agenda of Family Businesses especially when it comes to dealing with issues around succession, so it is now more important than ever that Family Business leaders fully understand the tax implications of their personal objectives. Our study shows how dramatically the tax burden can vary between countries given the same fact pattern.”
The European Family Business Tax Monitor is based on the findings of 23 countries which undertook a taxation review on two scenarios for Oakwood, a family business valued at €10m. This first Monitor has looked into the tax impact of the transfer of the business to family members upon inheritance and retirement. Each participating country was given two case studies and a questionnaire to complete providing details on how their country would tax each event. Further research and analysis was then undertaken to highlight key trends in relation to exemptions and reliefs.
European Family Businesses (EFB) is the federation of national associations representing long-term family owned enterprises, including small, medium-sized and larger companies. EFB represents 1 trillion euros in aggregated turnover, which is 9 per cent of European GDP. EFB’s mission is to press for policies that recognise the fundamental contribution of family businesses in Europe’s economy and create a level playing field when compared to other types of companies.
KPMG’s Global Family Business Centre of Excellence is designed to leverage KPMG member firms expertise on Family Businesses, enabling them to offer specialized insight to clients. This cross-border initiative aims to position KPMG member firms as leading advisors to family businesses. KPMG operates in 155 countries and have over 155,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
European Family Businesses
Phone: + 32 (0)2 893 97 10
Corporate Communications Manager, Tax, Pensions and Economics, KPMG in the UK
+44 207 694 4246